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C O N C E P T S I N E N T E R P R I S E
R E S O U R C E P L A N N I N G
Fourth Edition

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C O N C E P T S I N E N T E R P R I S E
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Fourth Edition
Ellen F. Monk
University of Delaware
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Western Michigan University

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His support and friendship are sorely missed.

BRIEF CONTENTS
Preface xv
Chapter 1
Business Functions and Business Processes 1
Chapter 2
The Development of Enterprise Resource Planning Systems 19
Chapter 3
Marketing Information Systems and the Sales Order Process 49
Chapter 4
Production and Supply Chain Management Information Systems

77
Chapter 5
Accounting in ERP Systems 117
Chapter 6
Human Resources Processes with ERP 159
Chapter 7
Process Modeling, Process Improvement, and ERP
Implementation 183
Chapter 8
RFID, Business Intelligence (BI), Mobile Computing, and the
Cloud 215
Glossary 243
Index 249

TABLE OF CONTENTS
Preface xv
Chapter 1 Business Functions and Business Processes 1
Functional Areas and Business Processes 2
Functional Areas of Operation 2
Business Processes 3
Functional Areas and Business Processes of a Very Small
Business 6
Marketing and Sales 6
Supply Chain Management 7
Accounting and Finance 7
Human Resources 8
Functional Area Information Systems 8
Marketing and Sales 9
Supply Chain Management 10
Accounting and Finance 12
Human Resources 13
Chapter Summary 16

Key Terms 16
Exercises 16
For Further Study and Research 17
Chapter 2 The Development of Enterprise Resource Planning
Systems 19
The Evolution of Information Systems 20
Computer Hardware and Software Development 21
Early Attempts to Share Resources 22
The Manufacturing Roots of ERP 22
Management’s Impetus to Adopt ERP 23
ERP Software Emerges: SAP and R/3 25
SAP Begins Developing Software Modules 26
SAP R/3 26
New Directions in ERP 27
PeopleSoft 27
Oracle 28
SAP ERP 28
SAP ERP Software Implementation 31
Features of SAP ERP 33
ERP for Midsized and Smaller Companies 34
Responses of the Software to the Changing Market 34
Choosing Consultants and Vendors 35
The Significance and Benefits of ERP Software and Systems 36

Questions About ERP 36
How Much Does an ERP System Cost? 36
Should Every Business Buy an ERP Package? 37
Is ERP Software Inflexible? 38
What Return Can a Company Expect from Its ERP Investment?
39
How Long Does It Take to See a Return on an ERP Investment?
39
Why Do Some Companies Have More Success with ERP Than
Others? 40
The Continuing Evolution of ERP 41
Chapter Summary 44
Key Terms 44
Exercises 45
Chapter 3 Marketing Information Systems and the Sales Order
Process 49
Overview of Fitter Snacker 50
Problems with Fitter Snacker’s Sales Process 51
Sales Quotations and Orders 52
Order Filling 53
Accounting and Invoicing 55
Payment and Returns 55
Sales and Distribution in ERP 56
Presales Activities 56

Sales Order Processing 56
Inventory Sourcing 57
Delivery 57
Billing 57
Payment 57
A Standard Order in SAP ERP 58
Taking an Order in SAP ERP 58
Discount Pricing in SAP ERP 64
Integration of Sales and Accounting 65
Customer Relationship Management (CRM) 66
Core CRM Activities 67
SAP’s CRM Software 68
The Benefits of CRM 72
Chapter Summary 74
Key Terms 74
Exercises 75
Chapter 4 Production and Supply Chain Management
Information Systems 77
Production Overview 78
Fitter’s Manufacturing Process 79
Fitter’s Production Sequence 79
Fitter’s Production Problems 80
Communication Problems 80
Inventory Problems 80
Accounting and Purchasing Problems 81
Exercise 4.1 82
x Table of Contents

The Production Planning Process 82
The SAP ERP Approach to Production Planning 83
Sales Forecasting 84
Exercise 4.2 85
Sales and Operations Planning 85
Sales and Operations Planning in SAP ERP 88
Disaggregating the Sales and Operations Plan in SAP ERP 93
Exercise 4.3 95
Demand Management 95
Exercise 4.4 97
Materials Requirements Planning (MRP) 97
Bill of Material 97
Lead Times and Lot Sizing 98
Exercise 4.5 101
Exercise 4.6 101
Materials Requirements Planning in SAP ERP 101
Detailed Scheduling 105
Providing Production Data to Accounting 107
Exercise 4.7 108

ERP and Suppliers 108
The Traditional Supply Chain 109
EDI and ERP 110
The Measures of Success 112
Exercise 4.8 112
Chapter Summary 114
Key Terms 114
Exercises 114
Chapter 5 Accounting in ERP Systems 117
Accounting Activities 118
Using ERP for Accounting Information 121
Operational Decision-Making Problem: Credit Management 123
Industrial Credit Management 123
Fitter’s Credit Management Procedures 124
Credit Management in SAP ERP 124
Exercise 5.1 127
Product Profitability Analysis 127
Inconsistent Record Keeping 127
Inaccurate Inventory Costing Systems 128
Inventory Cost Accounting Background 128
ERP and Inventory Cost Accounting 129
Product Costing Example 130
Exercise 5.2 131
Product Cost Analysis in SAP ERP 131
Activity-Based Costing and ERP 132
Table of Contents xi

Problems Consolidating Data from Subsidiaries 133
Currency Translation 134
Intercompany Transactions 135
Management Reporting with ERP Systems 136
Data Flows in ERP Systems 136
Document Flow for Customer Service 137
Built-In Management-Reporting and Analysis Tools 138
The Enron Collapse 139
Outcome of the Enron Scandal 140
Key Features of the Sarbanes-Oxley Act of 2002 141
Implications of the Sarbanes-Oxley Act for ERP Systems 142
Archiving 143
User Authorizations 145
Tolerance Groups 146
Financial Transparency 147
Exercise 5.3 150
Trends in Financial Reporting—XBRL 150
Chapter Summary 151
Key Terms 152

Exercises 152
Chapter 6 Human Resources Processes with ERP 159
Problems with Fitter’s Human Resources Processes 160
Recruiting Process 161
The Interviewing and Hiring Process 162
Human Resources Duties After Hiring 164
Human Resources with ERP Software 167
Advanced SAP ERP Human Resources Features 172
Time Management 172
Payroll Processing 173
Travel Management 173
Training and Development Coordination 175
Additional Human Resources Features of SAP ERP 177
Mobile Time Management 177
Management of Family and Medical Leave 177
Management of Domestic Partner Benefits 177
Administration of Long-Term Incentives 177
Personnel Cost Planning 178
Management and Payroll for Global Employees 178
Management by Objectives 178
Chapter Summary 180
Key Terms 180
Exercises 180
xii Table of Contents

Chapter 7 Process Modeling, Process Improvement, and ERP
Implementation 183
Process Modeling 184
Flowcharting Process Models 184
Fitter Expense-Reporting Process 185
Exercise 7.1 187
Extensions of Process Mapping 187
Event Process Chain (EPC) Diagrams 189
Exercise 7.2 196
Process Improvement 197
Evaluating Process Improvement Prior to Implementation 198
ERP Workflow Tools 200
Implementing ERP Systems 203
ERP System Costs and Benefits 205
Implementation and Change Management 206
Implementation Tools 206
System Landscape Concept 210
Chapter Summary 211
Key Terms 211
Exercises 211

Chapter 8 RFID, Business Intelligence (BI), Mobile Computing,
and the Cloud 215
Radio Frequency Identification (RFID) Technology 216
Business Intelligence/Business Analytics 219
In-Memory Computing 220
Mobile Computing 224
From Internet-Enabled to Cloud Computing 226
SAP and the Internet 226
NetWeaver 226
NetWeaver Tools and Capabilities 227
NetWeaver at Work for Fitter 228
Exercise 8.1 228
SaaS: Software as a Service 229
SAP Business ByDesign 229
Advantages of Using SaaS 230
Disadvantages of Using SaaS 231
Exercise 8.2 233
Option 1: Buying Computers and Software Rights for an ERP
System 234
Option 2: Using an SaaS Provider to Deliver ERP Software 235
Calculate the NPV and Make a Recommendation 235
Chapter Summary 238
Key Terms 238
Exercises 238
Glossary 243
Index 249
Table of Contents xiii

PREFACE
This is a book about Enterprise Resource Planning (ERP)
systems; it is also about
how a business works and how information systems fit into
business operations. More
specifically, it is about looking at the processes that make up a
business enterprise
and seeing how ERP software can improve the performance of
these business pro-
cesses. ERP software is complicated and expensive. Unless a

company uses it to
become more efficient and effective in delivering goods and
services to its customers,
an ERP system will only be a drain on company resources.
Our experience in teaching about ERP systems has revealed that
undergraduate
business students do not always understand how businesses
operate, and advanced
undergraduate students—and even many MBA students—do not
truly grasp the pro-
blems inherent in unintegrated systems. These students also do
not comprehend
business processes and how different functional areas must
work together to achieve
company goals. As a result, many students do not understand
how an information
system should help business managers make decisions.
Consequently, we set out to write a book that does the
following:
• Describes basic business functional areas and explains how
they are related
• Illustrates how unintegrated information systems fail to
support business
functions and business processes that cut across functional area
boundaries
• Demonstrates how integrated information systems can help a
company pros-
per by improving business processes and by providing business
managers
with accurate, consistent, and current data

We have found that our focus on business processes has been
well received.
The Approach of This Book
A key feature of our book is the use of the fictitious Fitter
Snacker Company, a man-
ufacturer of nutritious snack bars, as an illustrative example
throughout the book. We
show how Fitter Snacker’s somewhat primitive and unintegrated
information systems
cause operational problems. We intentionally made the systems’
problems easy to
understand, so the student could readily comprehend them.
Potential solutions for
solving integration problems are illustrated using SAP’s ERP
software.
The fourth edition of Concepts in Enterprise Resource Planning
reflects the
current state of the ERP software market and other areas of the
information technol-
ogy market that affect ERP systems, while adding updated
examples of how compa-
nies are using integrated systems to solve business problems
and achieve greater
success. The book has eight chapters:
• Chapter 1, “Business Functions and Business Processes,”
explains the pur-
poses for, and information systems requirements of, main
business functional
areas—Marketing and Sales, Supply Chain Management,
Accounting and

Finance, and Human Resources. This chapter also describes how
a business
process cuts across the activities within business functional
areas and why
managers need to think about making business processes work.
• Chapter 2, “The Development of Enterprise Resource Planning
Systems,”
provides a short history of business computing and the
developments that led
to today’s ERP systems. Chapter 2 concludes with an overview
of ERP issues
and an introduction to the SAP ERP software.
• Chapter 3, “Marketing Information Systems and the Sales
Order Process,”
describes the Marketing and Sales functional area, and it
highlights the pro-
blems that arise with unintegrated information systems. To
make concepts easy
to understand, the Fitter Snacker running example is introduced.
After
explaining Fitter Snacker’s problems with its unintegrated
systems, we show
how an ERP system can help a company avoid these problems.
Sample SAP ERP

screens are used to illustrate the concepts. Because using ERP
can naturally
lead a company into ever-broadening systems’ integration, a
discussion of
customer-relationship management (CRM) software concludes
the chapter.
• Chapter 4, “Production and Supply Chain Management
Information Systems,”
describes how ERP systems support Supply Chain
Management—the coordi-
nated activities of all the organizations involved in converting
raw materials
into consumer products on the retail shelf. As in Chapter 3, the
problems
caused by Fitter Snacker’s unintegrated information system are
explored,
followed by a discussion of how ERP software could help solve
these problems.
• Chapter 5, “Accounting in ERP Systems,” describes
accounting processes and
how ERP systems support those processes. This chapter clearly
distinguishes
between financial accounting (FI) and managerial accounting
(CO) issues.
Included is an overview of the Enron collapse and the resulting
Sarbanes-
Oxley Act along with the act’s impact on information systems,
specifically
management controls and audit capabilities. XBRL—and its
relationship to
ERP systems and financial reporting—is explored, along with
the transition to
the IFRS accounting standards.

• Chapter 6, “Human Resources Processes with ERP,” covers
human resource
management. While the Human Resource software module is the
least
integrated component of all ERP systems, it includes numerous
processes
that are critical to a company’s success, including strategic
issues like
succession planning.
• Chapter 7, “Process Modeling, Process Improvement, and ERP
Implementation,”
first presents flowcharting basics, followed by the highly
structured EPC process
model. Implementation issues conclude the chapter. We believe
that process
improvement, not large-scale implementation, should be the
focus in an intro-
ductory ERP course.
• Chapter 8, “RFID, Business Intelligence (BI), Mobile
Computing, and the
Cloud,” covers current technologies that are impacting ERP
systems. In this
edition, the text covers radio frequency identification (RFID),
business intel-
ligence (BI) and in-memory computing, mobile computing, and
the cloud.
Because technology changes rapidly, this chapter provides an
introduction to
these current topics, rather than an exhaustive treatment of the
subjects, and
the instructor will likely want to provide current supplements.
xvi Preface

How Can You Use This Book?
This fourth edition continues our goal of keeping the text at an
introductory level.
The book can be used in a number of ways:
• The book, or selected chapters, could be used for a three-week
ERP treat-
ment in undergraduate Management Information Systems,
Accounting
Information Systems, or Operations Management courses.
• Similarly, the book or selected chapters could be used in MBA
courses, such
as foundation Information Systems or Operations Management
courses.
Although the concepts presented here are basic, the astute
instructor can
build on them with more sophisticated material to challenge the
advanced
MBA student. Many of the exercises in the book require
research for their
solution, and the MBA student could do these in some depth.
• The book could serve as an introductory text in a course

devoted wholly to ERP.
It would provide the student with a basis in how ERP systems
help companies to
integrate different business functions. The instructor might use
Chapter 8 as
the starting point for teaching the higher-level strategic
implications of ERP and
related topics. The instructor can pursue these and related topics
using his or
her own resources, such as case studies and current articles.
• Because of the focus on fundamental business issues and
business processes,
the book can also be used in a sophomore-level Introduction to
Business course.
Except for a computer literacy course, we assume no particular
educational or
business background. Chapters 1 and 2 lay out most of the
needed business and
computing groundwork, and the rest of the chapters build on
that base.
Features of This Text
To bring ERP concepts to life (and down to earth) this book
uses sales, manufactur-
ing, purchasing, human resources, and accounting examples for
the Fitter Snacker
company. Thus, the student can see problems, not just at an
abstract level, but within
the context of a company’s operations. We believe this approach
makes business pro-
blems and the role ERP can play in solving them easier to
understand.
The book’s exercises have the student analyze aspects of Fitter

Snacker’s infor-
mation systems in various ways. The exercises vary in their
difficulty; some can be
solved in a straightforward way, and others require some
research. Not all exercises
need to be assigned. This gives the instructor flexibility in
choosing which concepts to
emphasize and how to assess students’ knowledge. Some
exercises explore Fitter
Snacker’s problems, and some ask the student to go beyond
what is taught in the
book and to research a subject. A solution might require the
student to generate a
spreadsheet, perform calculations, document higher-level
reasoning, present the
results of research in writing, or participate in a debate.
The book includes an additional element designed to bring ERP
concepts to life:
Another Look features, which are short, detailed case studies
that focus on problems
faced by real-world companies.
We have illustrated ERP concepts and applications by showing
how SAP ERP
would handle the problems discussed in the book. Screen shots
of key SAP ERP tools
are shown throughout to illustrate ERP concepts. Many of the
book’s exercises ask the
student to think about how a problem would be addressed using
ERP software.
Preface xvii

Instructor Materials
The following supplemental materials are available when this
book is used in a class-
room setting. All of the teaching tools available with this book
are provided to the
instructor on a single CD-ROM. Most can also be found online
at www.course.com.
Instructor materials are password-protected.
• Electronic Instructor’s Manual—The Instructor’s Manual
assists in class prep-
aration by providing suggestions and strategies for teaching the
text, chapter
outlines, technical notes, quick quizzes, discussion topics, and
key terms.
•
Solution
s—Answers to end-of-chapter questions and exercises are
provided.
• Sample syllabi—The sample syllabi and course outlines are

provided as a
foundation to begin planning and organizing your course.
• ExamView Test Bank—ExamView allows instructors to create
and administer
printed, computer (LAN-based), and Internet exams. The Test
Bank includes
hundreds of questions that correspond to the topics covered in
this text,
enabling students to generate detailed study guides that include
page refer-
ences for further review. The computer-based and Internet
testing components
allow students to take exams at their computers, and also save
the instructor
time by grading each exam automatically. The Test Bank is also
available in
Blackboard and WebCT versions posted online at
www.course.com.
• PowerPoint Presentations—Microsoft PowerPoint slides for
each chapter are
included as a teaching aid for classroom presentation, to make
available to

students on the network for chapter review, or to be printed for
classroom
distribution. Instructors can add their own slides for additional
topics they
introduce to the class.
• Distance learning—Course Technology is proud to present
online test banks
in WebCT and Blackboard to provide the most complete and
dynamic learn-
ing experience possible. Instructors are encouraged to make the
most of the
course, both online and offline. For more information on how to
access the
online test bank, contact your local Course Technology sales
representative.
• Figure files—Figure and table files from each chapter are
provided for your
use in the classroom.
• Hands-on SAP exercises—Exercises are available for member
institutions
through the SAP University Alliance. These exercises use a
database that was

built for the fictitious Fitter Snacker company.
A C K N O W L E D G M E N T S
Our thanks go out to our development editor, Mary Pat Shaffer,
whose attention to detail
made much more work for us, but resulted in a much-improved
text for this edition. We
are grateful for the support and guidance of the entire MIS team
at Course Technology,
particularly Kate Mason, Senior Product Manager, and Aimee
Poirier, MIS Product
Manager, for working with authors who frequently had
problems meeting deadlines. We
would not have been able to continue on our journey to
understand ERP systems without
the continued support of SAP America through its University
Alliance program, especially
Heather Czech Matthews, John Baxter, Gale Corbitt, and Alex
McLeod, Jr. And finally, we
thank our students, whose honesty and desire to learn have
inspired us.
xviii Preface

http://www.course.com
http://www.course.com
C H A P T E R 1
B U S I N E S S F U N C T I O N S A N D
B U S I N E S S P R O C E S S E S
L E A R N I N G O B J E C T I V E S
After completing this chapter, you will be able to:
• Name the main functional areas of operation used in business
• Differentiate between a business process and a business

function
• Identify the kinds of data each main functional area produces
• Identify the kinds of data each main functional area needs
• Define integrated information systems, and explain why they
are essential
in today’s globally competitive business environment
I N T R O D U C T I O N
Enterprise Resource Planning (ERP) systems are core software
programs used by companies to
integrate and coordinate information in every area of the
business. ERP (pronounced “E-R-P”)
programs help organizations manage company-wide business
processes, using a common database
and shared management reporting tools. A business process is a
collection of activities that takes
one or more kinds of input and creates an output, such as a

report or forecast, that is of value to the
customer. ERP software supports the efficient operation of
business processes by integrating tasks
related to sales, marketing, manufacturing, logistics,
accounting, and staffing—throughout a
business. In addition to this cross-functional integration, which
is at the heart of an ERP system,
companies connect their ERP systems, using various methods,
to coordinate business processes

with their customers and suppliers. In later chapters, you will
learn how successful businesspeople
use ERP programs to improve how work is done within a
company and between companies.
Chapter 1 provides a background for learning about ERP
software.
FUNCTIONAL AREAS AND BUSINESS PROCESSES
To understand ERP, you must first understand how a business
works. Let’s begin by
looking at a typical business’s areas of operation. These areas,
called functional areas of
operation, are broad categories of business activities.
Functional Areas of Operation
Most companies have four main functional areas of operation:
Marketing and Sales (M/S),
Supply Chain Management (SCM), Accounting and Finance
(A/F), and Human Resources
(HR). Each area is composed of a variety of narrower business
functions, which are

activities specific to that functional area of operation. Examples
of the business functions
of each area are shown in Figure 1-1.
Functional
area of
operation
Marketing and
Sales
Supply Chain
Management
Accounting and
Finance
Human
Resources
Marketing a
product
Purchasing

goods and raw
materials
Financial
accounting of
payments from
customers and
to suppliers
Recruiting and
hirin g
Taking sales
orders
Receiving
goods and raw
materials
Cost allocation
and control
Training
Customer

support
Transportation
and logistics
Planning and
budgeting
Payroll
Customer
relationship
management
Scheduling
production runs
Cash-flow
management
Benefits
Sales
forecasting

Manufacturing
goods
Government
compliance
Advertising Plant
maintenance
Business
functions
Source Line: Course Technology/Cengage Learning.
FIGURE 1-1 Examples of functional areas of operation and
their business functions
2
Chapter 1

Historically, businesses have had organizational structures that
separated the
functional areas. Business schools have been similarly
organized, so each functional area
has been taught as a separate course. In a company separating
functional areas in this
way, Marketing and Sales might be completely isolated from
Supply Chain Management,
even though the Marketing and Sales staff sell what the
employees in Supply Chain
Management procure and produce. Thus, you might conclude
that what happens in one
functional area is not closely related to what happens in others.
As you will learn in this
chapter, however, functional areas are interdependent, each
requiring data from the
others. The better a company can integrate the activities of each

functional area, the
more successful it will be in today’s highly competitive
environment. The Association to
Advance Collegiate Schools of Business (AACSB)—the
accreditation board of university
business schools—is now promoting integration between
functional areas of business for
higher education.
Integration also contributes to improvements in communication
and workflow. Each
area’s information system depends on data from other functional
areas. An information
system (IS) includes the people, procedures, software, and
computers that store, organize,
analyze, and deliver information. This chapter illustrates the
need for information sharing
between functional areas and the effects on the business if this
information is not
integrated. In later sections, you will also see some examples of
typical business processes
and how these processes routinely cross functional areas.
Business Processes
More managers are now thinking in terms of business processes

rather than business
functions. Recall that a business process is a collection of
activities that takes one or more
kinds of input and creates an output that is of value to the
customer. The customer for a
business process may be a traditional external customer (the
person who buys the finished
product), or it may be an internal customer (such as a colleague
in another department).
For example, what is sold through Marketing and Sales is linked
to what is procured and
produced by Supply Chain Management. This concept is
illustrated in Figure 1-2.
FIGURE 1-2 Sample business processes related to the sale of a
smartphone
3
Business Functions and Business Processes

Thinking in terms of business processes helps managers look at
their organization
from the customer’s perspective. Consider the example
illustrated in Figure 1-2 of a
customer who wants to purchase a new smartphone. The
customer wants information
about the company’s products so she can select a smartphone
and various high-tech
accessories for the phone. She wants to place her order quickly
and easily, and perhaps
even arrange for financing through the company. She expects
quick delivery of the correct
model of smartphone, and she wants 24-hour customer support
for any problems. The
customer is not concerned about how the smartphone was

marketed, how its components
were purchased, how it was built, or how the delivery truck will
find the best route to her
house. The customer wants the satisfaction of having the latest
in mobile phone
technology at a reasonable price.
Businesses must always consider the customer’s viewpoint in
any transaction. What is
the difference between a business function and a business
process from the customer’s
point of view? Suppose the customer’s mobile phone is
damaged during shipment. Because
only one functional area is involved in accepting the return of
the damaged item, receipt
of the return is a business function—specifically, it is part of
the customer relationship
management function of Marketing and Sales. Because several
functional areas are
involved in the repair and return of the mobile phone back to
the customer, the handling
of the repair is a business process. Thus, in this example, the
customer is dealing
with many of the company’s functional areas in the process of
buying and obtaining

a smartphone.
A successful customer interaction is one in which the customer
(either internal or
external) is not required to interact separately with each
business function involved in the
process. If companies are not coordinating their business
functions, a customer could
receive conflicting information and likely would quickly
become dissatisfied. Successful
business managers view their business operations from the
perspective of a satisfied
customer and strive to present one consistent (and positive)
“face” to the customer.
For the mobile phone company to satisfy its customers, it must
make sure its
functional areas of operation are integrated. Mobile phone
technology changes rapidly,
and the devices the phone company sells change frequently. To
provide customers with
accurate information, people performing the sales function must
have up-to-date
information about the latest mobile phones available for sale;
otherwise, a customer

might order a smartphone that the company’s manufacturing
plant no longer produces.
People performing the manufacturing function need to receive
the details of a customer’s
smartphone order quickly and accurately from the employee (or
online ordering system)
performing the sales function, so the right phone can be
packaged and shipped on time
to the customer. If the customer is financing the smartphone
through the mobile phone
company, the employees performing the sales order function
must gather information
about the customer and process it quickly, so financing can be
approved in time to
support shipping the phone.
Sharing data effectively and efficiently between and within
functional areas leads to
more efficient business processes. Information systems that are
designed so functional
areas share data are called integrated information systems.
Working through this textbook
will help you understand the benefits of integrated information
systems and the problems
that can occur when information systems are not integrated.

Research has shown that
integrated information systems can help managers better control
their organizations.
With enhanced information flow, communication between parts
of the company improves,
4
Chapter 1
productivity increases, and costs decrease. In effect, integrating
the information systems
can make for a more effective overall organization—hence,

more efficient business
processes. Figure 1-3 illustrates the process view of business
operations.
Businesses take inputs (resources) in the form of material,
people, and equipment,
and transform these inputs into goods and services for
customers. Effectively managing
these inputs and business processes requires accurate and up-to-
date information. For
example, the sales staff takes a customer’s order, and
production employees schedule the
manufacturing of the product. Logistics employees schedule and
carry out the delivery of
the product. If raw materials are needed to make the product,
production prompts
purchasing staff to arrange for their purchase and delivery.
Logistics will receive the raw
material, verify its receipt to accounting so the vendor can be
paid, and deliver the goods
to production. Throughout, accounting keeps appropriate
transaction records.
A N O T H E R L O O K

Integrated Information Systems
The world today is information driven. Getting the right
information to the right person
can make a huge difference in terms of a company’s bottom
line. But are some systems
just too complicated to be fully integrated? Although the
financial services industry
spends more on information technology than any other industry
($500 billion worldwide
in 2009), many financial institutions do not have fully
integrated information systems.
Why is this so? The reasons are many. Banks were the first
organizations to adopt
information systems, so many of their systems are legacy (old)
systems that would be
difficult and expensive to update. In addition, many banks have
gone through multiple
phases of acquisition, which in itself results in duplicate
information systems.
Government regulations on financial institutions have also
brought about additional
(continued)

Customer order process
S
a
le
s
fu
n
ct
io
n
A
cc
o
u
n
ti
n

g
fu
n
ct
io
n
P
u
rc
h
a
si
n
g
fu
n
ct
io

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P
ro
d
u
ct
io
n
fu
n
ct
io
n
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g
is
ti

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fu
n
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n
Material order process
FIGURE 1-3 A process view of business operations
5

systems. And many financial organizations write their own
proprietary systems for
market trading, thinking that gives them a leg up on their
competition. Some of the
more sophisticated financial products, such as hedge funds and
derivatives, are
generated via complex programs. In addition, a great deal of
financial tracking is
performed on spreadsheets, which may not be connected to any
integrated system.
The end result of these unintegrated systems is a lack of
consistent data across
systems, which can lead to an inaccurate assessment of risk.
Most financial systems
written today are honed for rapid trading, not for regulation or
for tracking anomalies
that could lead to problems. Some IT experts claim that the
global financial networks are

now unstable and that the fast quantitative trading programs in
place could lead rapidly
to potentially disastrous outcomes.
Question:
1. Do you think some of the problems associated with the
financial crisis of 2008
could have been avoided if financial firms had more integrated
information?
If so, how, or if not, why not?
FUNCTIONAL AREAS AND BUSINESS PROCESSES
OF A VERY SMALL BUSINESS
Next, we will look at the way business processes involve more
than one functional area,
using a fictitious small business as an example—a coffee shop
that you own. We will
examine the business processes of the coffee shop and see why
coordination of the
functional areas helps achieve efficient and effective business
processes. You will see the
role that information plays in this coordination and how
integration of the information

system improves your business.
Even though just a few people can run a small coffee shop, the
operation of the
business requires a number of processes. Coordinating the
activities within different
functional areas requires accurate and timely information.
Marketing and Sales
Marketing and Sales (M/S) functions include developing
products, determining pricing,
promoting products to customers, and taking customers’ orders.
Marketing and Sales also
helps create a sales forecast to ensure the successful operation
of the coffee shop.
For the most part, this is a cash business, but you still need to
keep track of your
customers so you can send flyers or occasional thank-you notes
to repeat customers. Thus,
your records must not only show the amount of sales, but also
identify repeat customers.
Product development can be done informally in such a simple
business; you gather

information about who buys which kind of coffee and note what
customers say about each
product. You also analyze historical sales records to spot trends
that are not obvious.
Deciding whether to sell a product also depends on how much it
costs to produce the
product. For example, some customers might be asking for a
fair-trade decaffeinated coffee
or a chai tea. To determine whether the new product could be
profitably produced and
sold, you could analyze data from Supply Chain Management,
including production
6
Chapter 1

information (such as the cost of purchasing an extra coffee
machine to make the special
fair-trade decaffeinated brew) and materials management data
(the cost of decaffeinated
coffee beans and chai tea).
This is a very small coffee shop, and you know most of your
clientele. Therefore,
although you run a cash business, good repeat customers are
allowed to run up a tab—up
to a point. Thus, your records must show how much each
customer owes as well as his or
her available credit. It is very important that the data be
available and accurate at the
time of a customer’s credit request. Since Accounting and
Finance records must be
accessed as a part of the selling process, the accounting
function has a critical role to play
in the sales process.
Supply Chain Management

The functions within Supply Chain Management (SCM) include
developing production
plans, ordering raw materials from suppliers, receiving the raw
material into the facility,
manufacturing products, maintaining facilities, and shipping
products to customers. In our
coffee shop example, Supply Chain Management functions
involve making the coffee
(manufacturing/production) and buying raw materials
(purchasing). Production is planned
so that, as much as possible, coffee is available when needed,
without excess that must be
disposed of. This planning requires sales forecasts from the
Marketing and Sales functional
area. Sales forecasts are estimates of future product demand,
which is the amount of a
product customers will want to buy. A forecast’s accuracy will
be improved if it is based on
historical sales figures (for example, factors such as cold
weather or local downtown social
events would impact the forecast for a given time period). Thus,
forecasts from Marketing
and Sales play an important role in the production planning
process.

Production plans are also used to develop requirements for raw
materials (coffee
beans, tea bags, sweeteners, cream, and milk) and packaging
(cups, stirrers, straws, plates,
and napkins). You must generate raw material and packaging
orders from these
requirements. If the forecasts are accurate, you will not lose
sales because of material
shortages, nor will you have excessive inventory that might
spoil.
Supply Chain Management and Marketing and Sales must
choose a recipe for each
beverage product sold, such as the quantity of coffee beans used
to brew each pot of
coffee. The standard recipe is a key input for deciding how
much to order of each raw
material, which is a purchasing function. Access to this recipe
is also necessary for
keeping good manufacturing records, allowing managers within
the Supply Chain
Management functional area (working with those in Accounting
and Finance) to break
down the costs to a per-cup cost. Managers can then compare
how much it actually costs

to make a cup of coffee, versus how much the recipe should
have cost.
Accounting and Finance
Accounting and Finance (A/F) performs financial accounting to
provide summaries of
operational data in managerial reports, and it is also responsible
for tasks such as
controlling accounts, planning and budgeting, and cash-flow
management. Accounting and
Finance functions include recording raw data about sales
transactions, raw material
purchases, payroll, and receipt of cash from customers. Raw
data are simply numbers
collected from sales, manufacturing, and other operations—
without any manipulation,
7

calculation, or arrangement for presentation. Those data are
then summarized in
meaningful ways to determine the profitability of the coffee
shop and to support
decision making.
Note that data from Accounting and Finance are used by
Marketing and Sales as well
as by Supply Chain Management. The sales records are an
important component of the
sales forecast, which is used in making staffing decisions and in
production planning. The
records from accounts receivable, which you use to determine
whether to grant credit to a
particular customer, are also used to monitor the overall credit-
granting policy of the
coffee shop. You need to be sure you have enough cash on hand

to purchase raw materials,
as well as to finance the purchase of new equipment, such as an
additional coffee machine
for the fair-trade decaffeinated coffee.
Human Resources
Even a simple business needs employees to support the
Marketing and Sales and Supply
Chain Management functional areas, which means the business
must recruit, train,
evaluate, and compensate employees. These are the functio ns of
Human Resources (HR).
At the coffee shop, the number of employees needed and the
timing of hiring depend
on the level of coffee and tea sales. Human Resources uses sales
forecasts to plan
personnel needs. A part-time helper might be needed at
forecasted peak hours or days, but
how much should a part-time helper be paid? That depends on
prevailing job market
conditions and state laws, and it is Human Resources’ job to
monitor those conditions.
Would increased sales justify hiring a part-time worker at the

prevailing wage? Or,
should you think about acquiring more automated ways of
making coffee, so a person
working alone could run the shop? Resolving these questions
requires input from
Marketing and Sales, Supply Chain Management, and
Accounting and Finance.
The coffee shop, while a relatively simple business, has many
of the processes needed
in larger organizations, and these processes involve activities in
more than one functional
area. In fact, it is impossible to discuss the processes in one
functional area without
discussing the links to other functional areas—connections that
invariably require the
sharing of data. Systems that are integrated using ERP software
provide the data sharing
that is necessary between functional areas.
FUNCTIONAL AREA INFORMATION SYSTEMS
This section will describe potential inputs and outputs for each
functional area of a
business (refer back to Figure 1-2 to review sample inputs and

outputs related to the sale
of a smartphone). Note the kinds of data needed by each ar ea
and how people use the
data. Also note that the information systems maintain
relationships between all functional
areas and processes.
8
Chapter 1
Marketing and Sales
As shown in Figure 1-4, the Marketing and Sales (M/S) area

needs information from all other
functional areas to effectively complete the business activities
for which it is responsible.
Customers communicate their orders to sales staff in person or
by telephone, email,
fax, the Web, and so on. In the case of Web-based systems,
customer and order data are
stored automatically in the information system; otherwise, data
must be entered manually,
by typing data into a computer keyboard or point-of-sale
system, or by using a bar-code
reader or similar device. Sales orders must be passed to Supply
Chain Management for
planning purposes and to Accounting and Finance for billing.
Sales order data are also
valuable for analyzing sales trends for business decision
making. For example, Marketing
and Sales management might use a report showing the trend of a
product’s sales to
evaluate marketing efforts and to determine strategies for the
sales force.
Marketing and Sales also has a role in determining product
prices, which requires an

understanding of the market competition and the costs of
manufacturing the product.
Pricing might be determined based on a product’s unit cost, plus
some percentage markup.
For example, if a product costs $5 per unit to make, and
management wants a 40 percent
markup, the selling price must be $7 per unit. Where does the
per-unit cost data come
from? Determining the cost of manufacturing a product requires
information from
Accounting and Finance, which, in turn, relies on Supply Chain
Management data.
People are a valuable asset to the firm, and Marketing and Sales
needs to interact with
Human Resources to exchange information on hiring needs,
legal requirements, and other
matters. For example, when Marketing and Sales has an opening
for a junior salesperson,
Human Resources will do the advertising for the job vacancy.
Human Resources might also
Customer
Sales orders

M/S
A/F
HR
Order status
Sales forecasts
and sales orders
Product
availability data
and order status
Cost/profit
analysis
Sales order
data
Hiring needs and
personnel information
Legal requirements

and job information
SCM
FIGURE 1-4 The Marketing and Sales functional area
exchanges data with customers and with
the Human Resources, Accounting and Finance, and Supply
Chain Management
functional areas
9

communicate information about expense reimbursement policies
to salespeople whose
jobs require travel.
To summarize, inputs for Marketing and Sales could include the
following:
• Customer data
• Order data
• Sales trend data
• Per-unit cost
• Company travel expense policy
Outputs for Marketing and Sales could include the following:
• Sales strategies
• Product pricing
• Employment needs
Supply Chain Management
Supply Chain Management (SCM) also needs information from
the various functional

areas, as shown in Figure 1-5.
Manufacturing firms often develop production plans of varying
length and detail, such as
short-range, medium-range, and long-range plans. Plans could
be developed for expanding
manufacturing capacity (based on sales forecasts), hiring new
workers, and paying extra
overtime for existing workers.
Production plans are based on information about product sales
(actual and projected),
which comes from Marketing and Sales. The purchasing
function bases its orders of raw
HR
Orders for raw
materials and
packaging
Production
plans, materials,

and inventory
Sales data and
manufacturing
cost analysis
Hiring needs and
Raw materials
availability and
delivery
Sales forecasts
and sales
orders
Product
availability
data and
order status

Legal requirements
and job information
M/SA/F
SCM
FIGURE 1-5 The Supply Chain Management functional area
exchanges data with suppliers and
with the Human Resources, Marketing and Sales, and
functional areas
10
Chapter 1

materials on production plans, expected shipments, delivery
lead times, and existing
inventory levels. With accurate data about required production
levels, raw material and
packaging can be ordered as needed, and inventory levels can be
kept low, saving money.
On the other hand, if data are inaccurate or not current,
manufacturing may run out of
raw material or packaging; such a shortfall is called a stockout.
Shortages of this type can
shut down production and cause the company to miss delivery
dates. To avoid stockouts,
management might choose to carry extra raw material and
packaging, known as safety
stock, which can result in an overinvestment in inventory. If
certain time-sensitive goods
are held too long, they can spoil and will have to be destroyed
rather than sold for profit.
The accuracy of the forecast determines the amount of safety

stock required to reduce the
risk of a stockout to an acceptable level. The less accurate the
forecast, the more safety
stock is required. Accurate forecasting and production planning
can reduce the need for
extra inventory and manufacturing capacity. In addition, Supply
Chain Management can
share its planning information with the company’s suppliers so
they can plan their
operations more efficiently, which should allow the suppliers to
reduce the price they
charge the company for their products.
Supply Chain Management records can provide the data needed
by Accounting and
Finance to determine how much of each resource (materials,
labor, supplies, and
overhead) was used to make completed products in inventory.
Supply Chain Management data can support the Marketing and
Sales function by
providing information about what has been produced and
shipped. For example, online
retailers such as Amazon provide detailed information on
customer orders through their

Web sites, and some send automated emails to notify customers
when their orders have
shipped. Shipping companies, such as UPS and FedEx, provide
online shipment-tracking
information. By entering a tracking number, the customer can
see each step of the shipping
process by noting where the package’s bar code was scanned.
Domino’s Pizza allows
customers who order through their Web site to track the
progress of their pizza order—
from preparation to baking to delivery. Thus, accurate and
timely production information
supports the sales process and can increase customer
satisfaction. In fact, Amazon ranked
number one in the Temkin Group’s 2011 survey of customer
experience. Two of the three
survey components relate to business process: functional
experience (how well the
customer was able to do what they wanted to do) and
accessiblility experience (how easy it
was to interact with the company). Performing well in such a
survey requires a smooth
integration of the Marketing and Sales and Supply Chain
Management processes.

Supply Chain Management also interacts with Human
Resources. For instance, Supply
Chain Management passes hiring information to Human
Resources, and Human Resources
informs Supply Chain Management of the company’s layoff and
recall policy, which might
pertain to workers in the plant.
To summarize, inputs for Supply Chain Management could
include the following:
• Product sales data
• Production plans
• Inventory levels
• Layoff and recall company policy
Outputs for Supply Chain Management could include the
following:
• Raw material orders
• Packaging orders
11

• Resource expenditure data
• Production and inventory reports
• Hiring information
Accounting and Finance (A/F) needs information from all the
other functional areas to
complete its tasks accurately, as shown in Figure 1-6.
Accounting and Finance personnel record the company’s
transactions in the books of
account (which often are computerized records). For example,

they record accounts
receivable when sales are made and cash receipts when
customers send in payments. In
addition, they record accounts payable when raw materials are
purchased and cash
outflows when they pay for materials. Finally, Accounting and
Finance personnel
summarize the transaction data to prepare reports about the
company’s financial position
and profitability.
Employees in other functional areas provide data to Accounting
and Finance:
Marketing and Sales provides sales data, Supply Chain
Management provides production
and inventory data, and Human Resources provides payroll and
benefit expense data. The
accuracy and timeliness of Accounting and Finance data depend
on the accuracy and
timeliness of the data from the other functional areas.
Marketing and Sales personnel require data from Accounting
and Finance to evaluate
customer credit. If an order will cause a customer to exceed his
or her credit limit,

Marketing and Sales should see that the customer’s accounts
receivable balance
Customer
Payments
HR
Invoices and
credit memos
Sales data and
manufacturing
cost analysis
Production plans;
materials and
inventory data
Cost/profit
analysis
Sales order
data

Hiring needs and
Legal requirements
and job information;
payroll and benefit
expense data
M/S
A/F
SCM
FIGURE 1-6 The Accounting and Finance functional area
exchanges data with customers and with
the Human Resources, Marketing and Sales, and Supply Chain
Management
functional areas
12

Chapter 1
(the amount owed to the company) is too high and hold new
orders until the customer’s
balance is lowered. If Accounting and Finance is slow to record
sales, the accounts
receivable balances will be inaccurate, and Marketing and Sales
might approve credit for
customers who have already exceeded their credit limits and
who might never pay off
their accounts. If Accounting and Finance does not record
customers’ payments promptly,
the company could deny credit to customers who actually owe

less than their credit limit,
potentially damaging the company’s relationship with those
customers.
To summarize, inputs for Accounting and Finance could include
the following:
• Payments from customers
• Accounts receivable data
• Accounts payable data
• Sales data
• Production and inventory data
• Payroll and expense data
Outputs for Accounting and Finance could include the
following:
• Payments to suppliers
• Financial reports
• Customer credit data
Human Resources
Like the other functional areas, Human Resources (HR) needs
information from the other
departments to efficiently complete its business activities, as

shown in Figure 1-7.
HR
Hiring needs and
Legal requirements
and job information
Hiring needs
and personnel
information
Hiring needs
and personnel
information
Legal requirements
and job information
Payroll and
benefit expense data;

legal requirements and
job information
M/S
A/F
SCM
FIGURE 1-7 The Human Resources functional area exchanges
data with the Accounting and
Finance, Marketing and Sales, and Supply Chain Management
functional areas
13

Tasks related to employee hiring, benefits, training, and
government compliance are
all the responsibilities of a human resources department. Human
Resources staff need
accurate forecasts of personnel needs from all functional units.
In addition, Human
Resources needs to know what skills are required to perform a
particular job and how
much the company can afford to pay employees. These data also
come from all
functional units.
State and federal laws require companies to observe many
governmental regulations
in recruiting, training, compensating, promoting, and
terminating employees—and these
regulations must be observed company-wide. Usually, it is also

Human Resources’
responsibility to ensure that employees receive training in a
timely manner and that they
get certified (and recertified) in key skills, such as materials
handling and equipment
operation. Human Resources must also disburse wages, salaries,
raises, and bonuses. For
these and other reasons, corporate Human Resources needs
timely and accurate data from
other areas.
Human Resources must create accurate and timely data and
reports for management
use. For example, Human Resources should maintain a database
of skills required to do
particular jobs as well as the prevailing pay rate for each
position. When the company
evaluates employees’ performance and compensation, analysis
of these data can help to
prevent the loss of valued employees because of low pay.
To summarize, inputs for Human Resources could include the
following:
• Personnel forecasts

• Skills data
Outputs for Human Resources could include the following:
• Regulation compliance
• Employee training and certification
• Skills database
• Employee evaluation and compensation
As shown in Figure 1-4 through Figure 1-7, a significant
amount of data is maintained
by and shared among the different functional areas. The
timeliness and accuracy of these
data are critical to each area’s success and to the company’s
ability to make a profit and
generate future growth. ERP software allows all the functional
areas to share a common
database so accurate, real-time information is available. In
Chapter 2, we will trace the
evolution of data management systems that led to ERP.
14
Chapter 1

A N O T H E R L O O K
Integrated Information Systems
Large organizations dealing with hundreds or thousands of
suppliers have a difficult task
in keeping information flowing to the right person at the right
time. At one point,
Lockheed Martin Aeronautics, with $13.2 billion in sales (2010)
and over 29,000
employees, was running 75 legacy systems, some dating from
the 1970s. To stay efficient
while keeping customers happy and taking on more aircraft

orders, the company
decided to implement an Enterprise Resource Planning system.
Lockheed Martin’s final system allows suppliers to handle more
of their own
transactions by accessing the new ERP system through an
existing secure Web portal.
For example, using the portal, a supplier can now track each
step of an order. In
addition, the supplier can see the production trends at Lockheed
Martin, and plan its
own production to satisfy Lockheed Martin’s needs—in effect,
anticipating orders.
Through this integration of many systems into one large ERP
system, Lockheed Martin
was able to cut costs and connect suppliers worldwide into its
system, enabling the
company to become more efficient.
In another industry, Tumi, Inc., the luggage and travel products
company, was
running several legacy systems that were written “in-house,”
meaning they were
programmed by company staff. The different systems covered
processes such as taking

an order, running the warehouse, and completing financial
statements. None of the
systems were linked; therefore, passing information from one
system to another was a slow
and cumbersome process. Tumi could not fill its orders on time,
had excess inventory in
the warehouse, and was frequently unable to meet customers’
shipping deadlines. To
address these issues—and to better support the company’s
expansion plans—Tumi made
a conscious effort to make information technology a business
driver, and the company
brought in an ERP system to integrate the business functions.
With the new integrated ERP system, Tumi has been able to
expand its business,
decrease inventory by 30 percent, cut its warehouse space by 38
percent, and increase
sales by 25 percent. Tumi’s management believes that one of
the company’s primary
strengths lies in its integrated systems. Manufacturing is now
quick to react when
demand increases, and forecasting is more accurate.
Question:

1. Using the Internet, research how many suppliers are typically
used for
manufacturing large commercial aircraft. List 10 such suppliers
and what they
do. How would an integrated ERP system, such as the one at
Lockheed Martin,
help manage all those suppliers?
15

Chapter Summary
• Companies that make and sell products have business
processes that involve four main
functional areas: Marketing and Sales (M/S), Supply Chain
Management (SCM),
Accounting and Finance (A/F), and Human Resources (HR).
These areas of operation
perform the following functions:
• Marketing and Sales develops products, sets product prices,
promotes products
through advertising and marketing, takes customer orders,
supports customers, and
creates sales forecasts.
• Supply Chain Management develops production plans, orders
raw materials from
suppliers, receives the raw material into the facility,
manufactures products, maintains
facilities, and ships products to customers.
• Accounting and Finance performs financial accounting to
provide summaries of
operational data in managerial reports, and also is responsible

for tasks such as
controlling accounts, planning and budgeting, and cash-flow
management.
• Human Resources recruits, hires, trains, and compensates
employees, ensures
compliance with government regulations, and oversees the
evaluation of employees.
• Each functional area is served by an information system.
Information systems capture,
process, and store data to provide information needed for
decision making.
• Employees working in one functional area often need data
from other functional areas. Ideally,
functional area information systems are integrated, so shared
data are accurate and timely.
• Today, business managers try to think in terms of business
processes that integrate the
functional areas, thus promoting efficiency and
competitiveness. An important aspect
of this integration is the need to share information between
functional areas, and with

business partners. ERP software provides this capability by
means of a single common
database.
Key Terms
Accounting and Finance (A/F)
business function
business process
Enterprise Resource Planning (ERP)
functional areas of operation
Human Resources (HR)
information system (IS)
integrated information system
Marketing and Sales (M/S)
raw data

safety stock
sales forecast
stockout
Supply Chain Management (SCM)
Exercises
1. Distinguish between a business function and a business
process. Describe how a business
process cuts across functional lines in an organization. How
might a manager organize
his or her staff in terms of business processes rather than
functional departments? What
benefits would there be with this type of organization? What
challenges would it pose?
16
Chapter 1

2. How could a university organize its business education
around business processes rather
than business functions? What would be the benefits to
students?
3. Assume your uncle raises bees for honey on his farm. You
help him package the honey
and sell it on the Internet. Reproduce Figure 1-1 for this small
business example. Add a
one-sentence description for each function as it relates to
selling this artisan honey online.
4. Go to the Amazon Web site (http://www.amazon.com), and
step through the process of

buying an item without actually purchasing the item. Based on
this experience, describe the
flows of information between Marketing and Sales, Accounting
and Finance, and Supply
Chain Management at Amazon. How easy is it to buy that item?
5. Using the Internet, research your state’s regulations for
employing teenagers—such as
minimum age of employment. Do the same for a neighboring
state. Are the two state
regulations the same? Why would it be important for Human
Resources to communicate
this information to a hiring department?
6. Think of the last time you bought a high-tech electronic item.
How does the process of
buying that item cut across the store’s various functional lines?
What information from
your receipt would need to be available to the business
functions? Which business
functions would need that information? How could your receipt
help in the process of
returning that item?
7. Assume you own and run a small ice cream shop located on

the grounds of a private pool.
You want to maximize sales and decide that allowing customers
to buy on credit could be a
big driver of sales since most people come to the pool without
cash. What information do
you need to keep track of to make sure a given customer doesn’t
go over their $20 credit
limit. What problems might occur?
For Further Study and Research
Amrani, Radouane E., Frantz Rowe, and Bénédicte Geffroy-
Maronnat. “The Effects of Enterprise
Resource Planning Implementation Strategy on Cross-
Functionality.” Information Systems
Journal 16, no. 1 (January 2006): 79.
Aurand, Timothy W., Carol DeMoranville, and Geoffrey L.
Gordon. “Cross-Functional Business
Programs: Critical Design and Development Considerations.”
Mid-American Journal of
Business 16, no. 2 (Fall 2001): 21–30.
Economist. “Silo But Deadly.” December 5, 2009.
http://www.economist.com/node/15016132.

Hannon, David. “Lockheed Martin Aeronautics Revolutionizes
Its Supply Chain.”
InsiderPROFILES 2, no. 2 (April 2011).
http://insiderprofiles.wispubs.com/article.aspx?
iArticleId=5706.
Hannon, David. “How TUMI, Inc. Cut Inventory by 30% and
Increased Sales by 25%.”
InsiderPROFILES 2, no. 1 (January 2011).
iArticleId=5600.
Temkin Group. “2011 Temkin Experience Ratings.” March 29,
2011. http://www.temkingroup.
com/news/2011-temkin-experience-ratings.
17

http://www.amazon.com
http://www.economist.com/node/15016132
http://www.temkingroup

C H A P T E R 2
T H E D E V E L O P M E N T O F
E N T E R P R I S E R E S O U R C E
P L A N N I N G S Y S T E M S
L E A R N I N G O B J E C T I V E S
After completing this chapter, you will be able to:
• Identify the factors that led to the development of Enterprise
Resource
Planning (ERP) systems
• Describe the distinguishing modular characteristics of ERP
software
• Discuss the pros and cons of implementin g an ERP system
• Summarize ongoing developments in ERP
I N T R O D U C T I O N
In today’s competitive business environment, companies try to
provide customers with goods and

services faster and less expensively than their competition. How
do they do that? Often, the key is
an efficient, integrated information system. Increasing the
efficiency of information systems results in
more efficient management of business processes. When
companies have efficient business
processes, they can be more competitive in the marketplace.
An Enterprise Resource Planning (ERP) system can help a
company integrate its operations by
serving as a company-wide computing environment that
includes a shared database—delivering
consistent data across all business functions in real time. (The
term real time refers to data and
processes that are always current).

This chapter will help you to understand how and why ERP
systems came into being and what
the future might hold for business information systems. The
chapter follows this sequence:
• Review of the evolution of information systems and related
causes for the recent
development of ERP systems
• Discussion of the few ERP software vendors that dominate the
market; the current industry
leader, German software maker SAP AG’s industry-leading
software product, SAP ERP, is

discussed as an example of an ERP system.
• Review of the factors influencing a company’s decision to
purchase an ERP system
• Description of ERP’s benefits
• Overview of frequently asked questions related to ERP
systems
• Discussion of the future of ERP software, including the
emphasis being placed on mobile
applications and accessibility of data
THE EVOLUTION OF INFORMATION SYSTEMS
Until recently, most companies had unintegrated information
systems that supported only
the activities of individual business functional areas. Thus, a
company would have a
marketing information system, a production information system,
and so on—each with its
own hardware, software, and methods of processing data and

information. Information
systems configured in this way are known as a silos because
each department has its
own stack, or silo, of information that is unconnected to the
next silo; silos are also known
as stovepipes.
Such unintegrated systems might work well within each
individual functional area,
but to be competitive, a company must share data among all the
functional areas. When a
company’s information systems are not integrated, costly
inefficiencies can result. For
example, suppose two functional areas have separate,
unintegrated information systems.
To share data, a clerk in one functional area needs to print out
data from another
area and then enter the data into her area’s information system.
Not only does this data
input take twice the time, it also significantly increases the
chance for data entry errors.
Alternatively, this process might be automated by having one
information system write
data to a file to be read by another information system. This
would reduce the probability

of errors, but it could only be done periodically (usually
overnight or on a weekend) to
minimize the disruption to normal business transactions.
Because of the time lag in
updating the system, the transferred data would rarely be up to
date. In addition, data
can be defined differently in different data systems; for
instance, products might be
20
Chapter 2

referred to by different part numbers in different systems. This
variance can create
further problems in timely and accurate information sharing
between functional areas.
It seems obvious today that a business should have integrated
software to manage all
functional areas. An integrated ERP system, however, is an
incredibly complex hardware
and software system that was not feasible until the 1990s.
Current ERP systems evolved
as a result of three things: (1) the advancement of the hardware
and software technology
(computing power, memory, and communications) needed to
support the system, (2) the
development of a vision of integrated information systems, and
(3) the reengineering of
companies to shift from a functional focus to a business-process
focus.
Computer Hardware and Software Development
Computer hardware and software developed rapidly in the 1960s
and 1970s. The first
practical business computers were the mainframe computers of
the 1960s. Although these

computers began to change the way business was conducted,
they were not powerful
enough to provide integrated, real-time data for business
decision making. Over time,
computers got faster, smaller, and cheaper—leading to today’s
proliferation of mobile
devices. The rapid development of computer hardware
capabilities has been accurately
described by Moore’s Law. In 1965, Intel employee Gordon
Moore observed that the
number of transistors that could be built into a computer chip
doubled every 24 months.
This meant that in the 1960s and 1970s the capabilities of
computer hardware were
doubling every 24 months, and this trend has continued, as
shown in Figure 2-1.
100,000,000
1,000,000,000
10,000,000
N
u

m
b
e
r
o
f
T
ra
n
si
st
o
rs
1,000,000
100,000
10,000

1,000
Intel Processors
Year
1970 1975 1980 1985 1990 1995 2000 2005 2010
4004
8080
8086
80286
80386
80486
Pentium
Pentium II
Pentium 4
Itanium 2

Core i7
Source Line: “The Evolution of a Revolution,”
ftp://download.intel.com/pressroom/kits/Intel
ProcessorHistory.pdf,” Intel.
FIGURE 2-1 The actual increase in transistors on a chip
approximates Moore’s Law
21
The Development of Enterprise Resource Planning Systems
ftp://download.intel.com/pressroom/kits/Intel

During this time, computer software was also advancing to take
advantage of the
increasing capabilities of computer hardware. In the 1970s,
relational database software
was developed, providing businesses with the ability to store,
retrieve, and analyze
large volumes of data. Spreadsheet software, a fundamental
business tool today, became
popular in the 1980s. With spreadsheets, managers could
perform complex business
analyses without having to rely on a computer programmer to
develop custom
programs.
The computer hardware and software developments of the
1960s, 1970s, and 1980s
paved the way for the development of ERP systems.
Early Attempts to Share Resources
As PCs gained popularity in business in the 1980s, it became
clear that users needed a
way to share peripheral equipment (such as printers and hard
disks, which were fairly

expensive in the early 1980s) and, more importantly, data. At
that point, important
business information was being stored on individual PCs, but
there was no easy way to
share the information electronically.
By the mid-1980s, telecommunications developments allowed
users to share data and
peripherals on local networks. Usually, these networks were
groups of computers
connected to one another within a single physical location. This
meant that workers could
download data from a central computer to their desktop PCs and
work with the data at
their desks.
This central computer–local computer arrangement is now
called a client-server
architecture. Servers (central computers) became more powerful
and less expensive
and provided scalability. Scalability means that the capacity of
a piece of equipment
can be increased by adding new hardware. In the case of a
client-server network, the
ability to add servers makes the network scalable—thus

extending the life of the
hardware investment. Scalability is a characteristic of client-
server networks, but
usually not of mainframe-based systems.
By the end of the 1980s, much of the hardware and software
needed to support the
development of ERP systems was in place: fast computers,
networked access, and
advanced database technology. Recall from Chapter 1 that ERP
programs help
organizations manage company-wide business processes using a
common database, which
holds a very large amount of data. The software that holds that
data in an organized
fashion, and that allows for the easy retrieval of data, is the
database management system
(DBMS). By the mid-1980s, the DBMS required to manage the
development of complex
ERP software existed. The final element required for the
development of ERP software was
understanding and acceptance from the business community.
Many businesspeople did
not yet recognize the benefits of integrated information systems
nor were they willing to

commit the resources to develop ERP software.
The Manufacturing Roots of ERP
The concept of an integrated information system took shape on
the factory floor.
Manufacturing software advanced during the 1960s and 1970s,
evolving from simple
22
Chapter 2
inventory-tracking systems to material requirements planning

(MRP) software. MRP is
a production-scheduling methodology that determines the timing
and quantity of
production runs and purchase-order releases to meet a master
production schedule.
MRP software allowed a plant manager to plan production and
raw materials
requirements by working backward from the sales forecast, the
prediction of future
sales. The plant manager first looked at Marketing and Sales’
forecast of customer
demand, then looked at the production schedule needed to meet
that demand,
calculated the raw materials needed to meet the required
production levels, and finally,
projected the cost of those raw materials. For a company with
many products, raw
materials, and shared production resources, this kind of
projection was impossible
without a computer to keep track of various inputs.
The basic functions of MRP could be handled by mainframe
computers; however, the
advent of electronic data interchange (EDI)—the direct
computer-to-computer exchange

of standard business documents—allowed companies to handle
the purchasing process
electronically, avoiding the cost and delays resulting from paper
purchase order and
invoice systems. The functional area now known as Supply
Chain Management (SCM)
began with the sharing of long-range production schedules
between manufacturers and
their suppliers.
Management’s Impetus to Adopt ERP
The hard economic times of the late 1980s and early 1990s
caused many companies to
downsize and reorganize. These company overhauls were one
stimulus for ERP
development. Companies needed to find some way to avoid the
following kind of situation
(which they had tolerated for a long time):
Imagine you are the CEO of Mountaineering, Inc., an outdoor
outfitter catering to the
young and trendy sportsperson. Mountaineering, Inc. is
profitable and keeping pace
with the competition, but the company’s information systems
are unintegrated and

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